Tue, 05 Dec 2023

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by Burak Akinci

ANKARA, Sep. 21 (Xinhua) -- Türkiye's central bank on Thursday announced an interest rate hike of 5 percent to tame resurging inflation, a move seen as cementing a reversal of unconventional policies of the past, experts said.

The monetary policy committee of the central bank decided to hike the key policy rate by 500 basis points, raising it to 30 from 25 percent, a 20-year high, citing higher-than-expected inflation readings in July and August for its decision.

It stressed that "monetary tightening was decided to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior."

Turkish inflation in August rose to 9.1 percent month on month, exceeding the market expectation of 7 percent, and driving the annual inflation rate to 58.9 percent.

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Annual inflation in Türkiye, one of the largest economies in the Middle East, soared to an alarming 85.5 percent in October 2022, marking a decades-high record. However, it subsequently subsided to 38.2 percent in June, only to rebound to 47.8 percent in July and rise further in August.

Since June, Türkiye's new economic team, advocating more conventional policies, has increased interest rates from 8.5 percent to a substantial 30 percent. This move aims to address the nation's persistent inflation issue, as the government departs from the loose monetary policies that contributed to a cost-of-living crisis.

By continuing monetary tightening on Thursday, the central bank hopes to send a message to foreign investors and international credit rating agencies that it is determined to fight inflation, economists said.

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"The central bank took a welcomed decision. More hikes should follow," Ozgur Demirtas, an Istanbul-based professor of economics, said in a post on X, the social platform formerly known as Twitter. He also pointed out that Türkiye "has still a long way to go" to economic recovery.

Hakan Kara, a former central bank chief economist and scholar at Ankara's Bilkent University, also said on the social platform that the new hike is "a step in the right direction" to fight stubborn inflation.

Positive statements from international rating agencies Moody's and Fitch, along with a decrease in Türkiye's five-year credit risk premium, suggest international markets' growing confidence in the country.

Fitch Ratings upgraded Türkiye's outlook from "negative" to "stable" this month, citing the policy overhaul. However, it also cautioned about uncertainties related to "the magnitude, longevity, and success of the policy adjustment to bring down inflation, partly due to political considerations."

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While high inflation has affected many countries globally, partly due to the Russia-Ukraine conflict, Türkiye faces one of the most significant challenges.

Moreover, the country's financial woes were exacerbated by devastating earthquakes in February, resulting in substantial reconstruction costs.

On September 6, the Turkish government released a report in which it raised its inflation forecasts and lowered its economic growth projections. The government now expects annual inflation to reach 65 percent by the end of this year, with a target of reducing it to 33 percent in 2024, and ultimately achieving single-digit inflation by 2026.

However, some analysts believe these projections are overly optimistic, considering Türkiye's longstanding battle against inflation.

"While the government's new program is comprehensive ... its objectives are (too) optimistic, and would put further pressure on the working class despite a return to more conventional economic policies," Can Selcuki, an Istanbul-based economist and market research expert, told Xinhua.

"This plan will increase the current injustice in revenues and put continued pressure on households for several more years," he added.

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